Resilience in emerging markets slated for 2018

The outlook for emerging market debt as an asset class will be a more compelling one for strategic investors during 2018, despite the significant global macro events expected, Lazard Asset Management has said.

“We’re looking at another year in 2018 of outsized returns within emerging market debt given the volatility,” Lazard AM emerging markets debt portfolio manager Arif Joshi told media during a briefing in Sydney today.

“We do think that the returns are going to come from more the currency side than dollar denominated debt so aside from the normal rationale of getting an emerging market portfolio because of diversity and portfolio management theory, we do think that emerging markets will outperform the developed world yet again in 2018.

“2018 has a lot more events than 2017 has had, and both the developed world and the emerging world are going to have to prove themselves in order for this bull market to continue … and it always comes down to those growth differentials – if they continue to move in favour of emerging markets, that should propel an emerging markets bull market further, which means emerging markets have a lot more Teflon, or resilience, during this type of macro backdrop than they would if they occurred in an emerging markets bear market.”

Joshi said for the Australian investor, currencies will react differently depending on whether it was a developed currency or not.

“Even in the emerging world, there are developed emerging markets and then there are undeveloped emerging markets: when you go to Eastern Europe, which are all investment grade countries with good balance sheets, they act more like developed market countries so when inflation moves higher in those countries, you tend to see their currencies appreciate,” he explained.

“When inflation moves higher in the real emerging market countries – Brazil, Turkey, Argentina – their currencies depreciate.

“Australia is somewhat of a hybrid in that you’re a highly developed country yet you’re levered to a lot of the same things that emerging markets are levered to so when inflation moves higher in Australia, your currency should appreciate and when it moves lower, your currency should depreciate.

“In this environment, it advantages Australian investors to have emerging markets exposure.”

As of last week, emerging market debt saw inflows of $99 billion this year.

“Emerging market debt is an asset class which is seeing significant inflows,” Joshi said.

“We expect that number to end 2017 at $120 billion – the record was $103 billion back in 2013.”

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